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Congress enters crucial week with budget, debt limit battles

BUDGET BATTLE: U.S. House Speaker John Boehner (R-OH) arrives at the U.S. Capitol in Washington, Oct. 5, 2013. Photo: Reuters/REUTERS/Jonathan Ernst

By Richard Cowan and Mark Felsenthal

WASHINGTON (Reuters) – The White House on Monday reiterated that President Barack Obama would not negotiate with Republicans over the threat of a debt default, sticking to its line as stock prices fell and a government shutdown moved into its second week.

But White House National Economic Council Director Gene Sperling did not rule out a short-term increase to the borrowing cap, such as two or three weeks, which could offer more time for an agreement. Speaking at a Politico breakfast, he said that while the administration prefers an increase that would last as long as possible, the length of the increase is Congress’s decision.

“The longer the debt limit is extended, the greater the certainty for our economy,” Sperling said. “That said, it is the responsibility of Congress to decide how long and how often they want to vote on doing that.”

Conservative Republicans in the House of Representatives have resisted funding the government for the current fiscal year until they extract concessions from Obama that would delay or defund his signature healthcare law.

Many of conservative Republicans want a similar condition placed on raising the debt ceiling, as well as measures aimed at cutting deficits.

Republican House Speaker John Boehner vowed on Sunday not to raise the U.S. debt ceiling without a “serious conversation” about what is driving the debt, while Democrats said it was irresponsible and reckless to raise the possibility of a U.S. default.

The last big confrontation over the debt ceiling, in August 2011, ended with an 11th-hour agreement under pressure from shaken markets and warnings of an economic catastrophe if there was a default. A similar last-minute resolution remains a distinct possibility this time.

Equities investors were unnerved by the apparent hardening of stances over the weekend, with European shares falling to a four-month low on Monday and U.S. stocks trading lower.

In comments on Sunday television political talk shows, neither Republicans nor Democrats offered any sign of impending agreement on either the shutdown or the debt ceiling, and both blamed the other side for the impasse.

“I’m willing to sit down and have a conversation with the president,” Boehner said on ABC’s “This Week.” But, he added, Obama’s “refusal to negotiate is putting our country at risk.”

In his list of demands for raising the debt ceiling, Boehner did not mention the Affordable Care Act, commonly known as Obamacare, but rather focused on the debt.

“It’s time to talk about the spending problem,” said Boehner, including measures to rein in costs of entitlement programs such as the Social Security retirement system and Medicare, the government-run health insurance program for seniors.

Democratic Senator Charles Schumer, whose constituency includes Wall Street and New York’s financial hub, on Monday said Boehner would be forced to act as the deadline for the nation’s debt ceiling gets closer, calling it “too dangerous” to not raise the U.S. debt limit and saying any default could lead to an economic “recession, depression or worse.”

“The economy could collapse. Will it? No one’s certain, but there’s a high enough chance that no one – no one – should risk it,” Schumer told CNN’s “New Day.”

China, the biggest foreign holder of U.S. Treasuries, urged Washington to take decisive steps to avoid a crisis and ensure the safety of Chinese investments.

“The United States is totally clear about China’s concerns,” Vice Finance Minister Zhu Guangyao said in the Chinese government’s first public comment on the October 17 deadline.

“We hope the United States fully understands the lessons of history,” Zhu told reporters in Beijing, referring to the downgrade of the U.S. credit rating by Standard & Poor’s in 2011.

SHUTDOWN, DEBT CEILING ISSUES MERGED

The two issues of the Federal government shutdown and the debt ceiling started out separately in the House but have been merged by the pressure of time.

Harry Reid, leader of the Democratic-led Senate, is expected to decide soon on whether to try to open formal debate on a “clean” bill, without extraneous issues attached, to raise the U.S. Treasury’s borrowing authority.

Passage of such a measure would require at least six of the Senate’s 46 Republicans to join its 54 Democrats in order to overcome potential procedural hurdles that opponents of Obamacare could erect.

According to one Senate Democratic aide, the debt limit hike might be coupled with an initiative to reform the U.S. tax code and achieve long-term savings in Social Security and Medicare, whose expenses have soared along with the population of retirees.

Republican lawmakers have floated other ideas, such as a very short debt limit increase, which would create time for more negotiations at the expense of further market uncertainty, and repeal of a medical device tax.

The tax is expected to generate some $30 billion over 10 years to help pay for healthcare insurance subsidies under Obamacare.

Some Democrats favor repealing the tax, but they insist that replacement revenues be found and repeal be considered only after the government reopens and the debt limit is raised.

MAJOR PROBLEMS IN HOUSE

Agreement in the Senate would send the tangle of issues back into the House, where the Republican caucus has adopted a hard line on both Obamacare and the debt ceiling.

There may be enough support in the House to pass a clean spending bill, according to some analysts. That would require almost all of the House’s 200 Democrats and about 20 of its 232 Republicans to vote in favor. But taking such a vote would require Boehner to violate his policy against bringing a vote on any legislation favored by less than a majority of House Republicans.

Reid’s spokesman Adam Jentleson issued a statement on Monday attacking what he called “Boehner’s credibility problem,” including the speaker’s assertion that there are not enough votes in the House to pass a clean bill.

“There is now a consistent pattern of Speaker Boehner saying things that fly in the face of the facts or stand at odds with his past actions,” Jentleson said. “Americans across the country are suffering because Speaker Boehner refuses to come to grips with reality.”

The Pentagon said over the weekend that it would recall around 350,000 of its furloughed civilian workers. The rest of the 800,000 or so federal employees idled by the shutdown faced another week off the job.

For the moment, neither side is moving toward accommodation, and the stakes rise with the passage of time.

For any deal to work, negotiators probably would have to choreograph a multipronged approach that allows all sides to declare victory, even if it is one that sets up another battle in mid-November or December.

While the shutdown so far has not caused major disruption in the markets, a fight over the debt ceiling could. From July 31 thru August 2 during the debt-limit standoff in 2011, the S&P 500 index lost 3 percent, and the deadlock led to a downgrade of the U.S. credit rating to AA-plus from AAA by S&P.

The outlooks from Moody’s and S&P, the only agency so far to have lowered its rating on U.S. debt, are both at “stable,” but Fitch Ratings has indicated a negative outlook for the U.S. debt rating.

All three agencies have said the U.S. debt profile has improved substantially over the past two years, with gross domestic product growth, while slow, proving to be persistently positive and the budget deficit trending lower.

Fitch said in a note last week that the U.S. rating is at risk in the current showdown over the debt ceiling because failure to raise it sufficiently in advance of the deadline raises questions about the full faith and credit of the United States to honor its obligations.

Political gridlock remains the greatest risk to the U.S. outlook, Fitch said in the note on October 1, the first day of the partial government shutdown.

“This ‘faith’ is a key underpinning of the U.S. dollar’s global reserve currency status and reason why the US ‘AAA’ rating can tolerate a substantially higher level of public debt than other ‘AAA’ sovereigns,” Fitch said.